Gary Wright

Gary Wright - BISS Research

The Post Trade Forum's aim is to propagate debate and discussion between senior practitioners in Post Trade Operations in the global securities market; to bring about increased awareness and knowledge across both buy-side and sell-side financial institutions in financial products and be a focal point for firms and practitioners to air views.

The financial inevitability of Clearing House consolidation

20 March 2012 | 3269 views | 2

In Europe we are blessed (If that’s the right word) with many Clearing Houses. We are told that this provides competition and drives down prices while producing an environment for innovation. Can anyone point out where any of these benefits are accruing?
Where is the proof that investors are getting a better economic deal and what was the most recent innovation from a Clearing House?

In fact the fragmented structure of Clearing Houses in Europe is an historic remnant of the previous century and most of the Clearing Houses have no real part to play in the future. Even if one assumes that this fragmented clearing house structure does provide
competition then the costs are still far too high. As the costs of fragmented collateral bounce around clearing houses until it finds its needed home. This not just once a day but is a continuous race round the clearing house track as margining and risk management
requirements demand that positions and counterparties are fully collateralised and margined.

Margining is equally fraught, with initial and variation margin management a whole industry on its own, bearing all the associated costs. The inability to cross margin and utilise multiple asset classes effectively burden financial services firms and guess
what the cost load is ultimately laid at the feet of the investors.

Arguably risks are increased with a fragmented Clearing House structure but some would argue the opposite and say concentration risks are the worry point. This particular argument looks at odds when the USA structure with the DTCC is used as a benchmark.
Big in the USA and with high levels of concentration appears to have the benefit of lower costs and total security. The very thing we are told that Europe gets with it’s all over the place clearing house structure

The truth is that despite interoperability and other measures to maintain the status quo consolidation into no more than two clearing houses is inevitable. Join in the discussion with top market practitioners at the next
Post Trade Forum debate on the 17th April hosted by the London Stock Exchange.

Comments: (4)

Kathleen Tyson-Quah - Granularity Ltd - London | 22 March, 2012, 17:10
While I agree that the multiplicity of clearing houses is an inefficient carryover from the last century, theses are almost always national monopolies, with some sense of their own local importance, and often staffed by ex-central bankers with an exagerrated
sense of their own importance. There are often quirks of local securities laws for transfer, registration, pledging, etc., which lend a colourable claim to the need for a local service. And local traders and investors prefer to transact in the local language
with the local clearing house in the local currency. Although many of the costs of cross-border instruction by SWIFT and high fees by banks have been eroded, these costs are still a signficant factor in preserving local clearing houses. The whole point of
TS2 was to preserve the existing inefficient diversity of existing clearers with a bit of expensive, over-engineered networking laid over it. And of course, to create more jobs for more surplus-to-requirements central bankers. Any sensible person who wants
consolidated clearing in Europe can use the existing cross-border ICSDs, Euroclear and Clearstream, with standardisation of all processing and a single view of porfolios. The ICSDs perform extraordinarily well, compete on innovation and service, and know their
cross-border business better than any local clearing house ever will.

There is no doubt a protective barrier to implmenting the changes that the market needs in clearing. I can not say how long this situation will last but i guess not for long. OTC in the frame could ignite the touch paper

I like the idea of an alternative to Clearing houses and see this as a quick and cost effective way of dealing with some of the problems at least. I am looking forward to giving these issues a good going over in the Post Trade Forum debate. It might be the
only forum where a spade will be called a spade and the issues uncovered and decided upon

Kathleen Tyson-Quah - Granularity Ltd - London | 22 March, 2012, 21:15
I was looking through my bookshelf today and found an article in RISK magazine I had written back in 1997 suggesting an architecture for a cross-border, cross-margining clearing house to optimise netting and the allocation of margin for globally active
dealers. Maybe I should dust it off and try again?

Gary's profile

CEO of B.I.S.S. Research, founder of the BISS Independent Accreditation for all systems and services provided to financial services companies internationally. Guest Lecturer at Reading University and...